One of the bullish arguments for SodaStream International (NASDAQ:SODA) is the huge runway ahead of it in U.S. households. It's only penetrated just more than 1% of the market here since its introduction a few years back, and the do-it-yourself soda maker predicts the in-home market could be as large as $40 billion and reaching 100 million homes.
As larger, better-financed rivals step up their presence in the space, it would seem the industry leader isn't so far off the mark. Coca-Cola (NYSE:KO) is partnering with Keurig Green Mountain to introduce a branded machine later this year; PepsiCo (NASDAQ:PEP) recently said it will beat them to the punch with a system made by privately held Bevyz that's scheduled to launch as soon as May; and Sodastream itself has teamed up with Whirlpool's KitchenAid for a sleek new countertop model.
While there is undoubtedly room for growth, there are problems with this modeling that suggests the companies and their investors are blowing their chances for success out of all proportion.
First, the 100 million household target market seems wildly optimistic. With the Census Bureau reporting that there are about 115 million households total in the U.S., that represents a near-90% penetration rate for in-home soda systems. That's akin to the share Windows has across all computing platforms, including desktop, laptop, and netbook, or Google has in search engines. And heck, as popular as Keurig itself is here in the U.S., its single-serve coffee system has only achieved 13% household penetration.
I'm just not seeing a DIY soda system as essential as the microwave oven (in 94% of U.S. households) or more important than broadband Internet connections (70%).
There's also the industrywide problem of declining soda consumption, which has fallen to levels not seen since the mid-1990s, and according to Beverage Marketing, because of consumer worries about sugar's contribution to obesity, artificially flavored diet sodas witnessed a near-7% drop in dollar sales in 2013 alone.
Now the market watchers at NPD Group say sales of home soda machines surged 30% year over year, which suggests at least some of the lost sales of traditional soda went to the DIY market, but that's a long way from saying it's going to be the majority form of consumption or even that there will be a preponderance of households making their own. SodaStream's less-than-stellar quarter says it's going to have a hard time getting there, too.
Although part of the rationale for making it yourself is that it's supposedly healthier, SodaStream syrups might not contain high-fructose corn syrup, but they do have the artificial sweetener acesulfame potassium, or Ace K. Other versions include sucralose, dextrose, and glycerol esters of wood rosin, which, while "generally recognized as safe" by the FDA -- just like MSG and, until recently, trans fats -- still falls into the Frankenfoods category of food technology. This ain't exactly a natural and organic alternative and will likely suffer the same fate as the beverages by the big boys of the industry that contain these ingredients.
Yes, SodaStream offers several unsweetened flavors and a line of Sparkling Naturals, but with its consumable segment the largest revenue producer of the company, aside from the CO2 cartridges it produces -- which by itself is what some people use the system for -- sugar is among the biggest raw material it uses.
Dr Pepper Snapple Group (NYSE:KDP) introduced in late 2011 a line of low-calorie beverages that relied upon Ace K, aspartame, and high-fructose corn syrup, and have seen terrible results. Its Core 4 TEN line of sodas has led to disappointing sales and convenience stores asking they be pulled from the shelves so they can stock better-selling drinks. Now, Dr Pepper, like Coke and Pepsi, is pursuing stevia as an alternative, but it's doubtful that will win many converts, either.
In short, it looks like the industry is using fantastical assumptions to justify their investment, but still will come up short against the realities of a consumer base that is concerned about the health effects of additives the beverage makers include in their sodas, even if there are ancillary lines that exclude them. Both look likely to cause the market to fizzle out and for investors to view the opportunity as distasteful as a days-old open can of soda.